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Unformatted text preview: And
because it is an earnings number before depreciation and amortization,
it is not affected by the method the company chooses to spread the
capital costs over the assets’ useful life. However, EBITDA, though Also known as …
EBITDA is also known as
operating income before
amortization, or OIBDA. 1 useful in some applications, is does not fully reflect the cash flows of a company.
The requirement that companies report cash flow information in the statement of cash flows provides
information that is useful in financial analysis and valuation. This statement requires the segregation of
cash flows by operations, financing, and investment activities. A key cash flow in both analysis and
valuation is the cash flow for/from operating activities. This cash flow is calculated by adjusting net
income for non-cash expenses and income, as well as for changes in working capital accounts. This
latter adjustment is used to convert the accrual-based accounting into cash-based accounting.
The calculation uses information from both the company’s income statement and its balance sheet:
(EQ 3) CFO = Net
+ depreciation + amortization +
net working capital Net working capital is defined as:
(EQ 4) Net working capital = Current assets – current liabilities Therefore, if net working capital increases, this is an offset to cash flow from operations, whereas if net
working capital decreases, this is an enhancement of the cash flow from operati...
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- Spring '14
- Behavioral Finance